Wills vs. Trusts
A Will, also known as a Last Will and Testament, is a legal document that states your intentions for the distribution of your assets after your death. In the event you have minor children (under the age of 18), a valid Will also allows you to designate a guardian who will care for your minor children upon your death. If you do not have a Will, your assets will be distributed according to your state intestacy laws.
WHAT IS PROBATE?
Probate is a process that changes title to assets and also guarantees the authenticity and legality of your Last Will and Testament. At your death it permits your financial custodians (banks, credit unions, stockbrokers, registrar of deeds, etc.) to safely release your savings accounts, stocks, real estate, etc. into the possession of your legal heirs, free from the fear of possible lawsuits by disinherited or disgruntled heirs.
HOW LONG DOES THE PROBATE PROCESS TAKE?
The probate process takes a minimum of 12 months in Massachusetts and costs anywhere from $3,500+ in legal fees, which consist of attorney fees and court costs.
WILL HEIRS HAVE ACCESS TO ACCOUNTS IMMEDIATELY?
No. Until the probate process is completed, your bank and other financial custodians will simply refuse to release your assets to your heirs. During the course of the procedure the assets are frozen and are not accessible. Most family financial needs must be put on hold while the court sifts through potential heirs, creditors, debtors, and possible legal challenges to the will.
CAN I AVOID PROBATE BY HAVING A WILL?
No. In fact, a will is the very reason for probate. A will must be guaranteed or “proven” in Probate Court. If you have a will, your estate must be probated.
DOES JOINT TENANCY AVOID PROBATE?
Yes and no. Joint ownership of assets with a spouse simply delays probate until the death of the surviving spouse. Probate occurs after both spouses are deceased.
CAN I JUST GIVE AWAY MY ASSETS TO MY CHILDREN?
Yes. However, this exposes the children to capital gains taxes that usually far exceed what it would have cost to probate the estate! It also exposes your assets to your children’s creditors – assets they could easily lose to settle a judgement against one of their children! Joint ownership of assets with your children is almost always the most expensive way to pass your assets to your children.
GUARDIANSHIPS
WHAT WILL HAPPEN IF I BECOME INCAPACITATED?
The 2023 Federal Estate Tax Exemption is $12,900,000 (indexed each year for inflation). After 2025, the exemption will revert back to $5.49 million exemption.
WHAT IS A GUARDIAN?
Typically a guardian is appointed when a court decides that you cannot make a decision, or if you have an illness such as Alzheimer’s disease where you are physically or mentally incapable of managing your own affairs.
DOES A WILL PROTECT ME IF I BECOME INCAPACITATED?
No. Many people are surprised to find out that a simple will does not keep the court from intervening into your affairs if you become incapacitated.
ARE GUARDIANSHIP PROCEEDINGS OPEN TO THE PUBLIC?
Yes. When the court gets involved, your records as well as the court proceedings are open to the public.
WHO PAYS FOR THE GUARDIANSHIP?
The court costs, legal bills, fees and bonds are paid from your estate. This is why we encourage everyone to plan ahead.
WHY ARE GUARDIANSHIP PROCEEDINGS NECESSARY?
The court oversees the management of the estate to prevent an unwanted person from taking control of your assets and possibly misusing them. The guardian makes financial decisions for you and protects your assets. The court could name your spouse, a child, a family member or an outside institution to control your affairs. It is the court’s decision, not yours.
FEDERAL ESTATE TAXES
WHAT IS THE FEDERAL AND MASSACHUSETTS ESTATE TAX?
It is a tax on any transfer of assets from a deceased person’s estate to his or her heirs.
WHAT ASSETS ARE TAXED?
All of the assets owned by the deceased person are subject to the estate tax, including property in joint tenancy, living trusts, and life insurance (unless the insurance policy was owned by another individual or an Irrevocable Life Insurance Trust.
WHAT ARE THE EXCLUSION AMOUNTS?
The exclusion amounts are as follows:
YEAR OF DEATH EXCLUSION AMOUNT
2023 $12,900,000 (indexed each year for inflation). Unless Congress makes these changes permanent, however, after 2025 the exemption will revert back to a $5.49 million exemption.
In Massachusetts, the exclusion amount is only $1,000,000
WHAT IS THE MARITAL DEDUCTION?
Assets that are transferred from one spouse to the other spouse at death are not taxed. This is called the “marital deduction,” and there is no limit on how much of your assets can be transferred.
ARE THERE DISADVANTAGES OF THE MARITAL DEDUCTION?
The marital deduction protects the surviving spouse from federal estate taxes. However, it may subject the surviving spouse’s estate to a higher estate tax later since the deceased spouse’s exemption will be lost and cannot then be used at a later date.
DOES MASSACHUSETTS HAVE A SEPARATE ESTATE TAX?
Yes. Massachusetts will impose an estate tax on estates worth more than $1,000,000 (2006-present).
IS THERE A BETTER ALTERNATIVE? YES
WHAT IS A LIVING TRUST?
A living trust, also known as a Revocable Living Trust is a legal document that holds title or ownership to your real property and assets. When you create a Revocable Living Trust, you transfer ownership of your assets to the trust. Transferring assets is typically called “funding” the trust.
IS A LIVING TRUST SIMILAR TO A WILL?
A living trust looks like a will. A Trust includes details and instructions for how you want your estate to be handled at your death. However, unlike a will a properly funded trust does the following:
-Does not go through probate
-Prevents the courts from controlling your assets at incapacity
-Gives you control over the assets you leave to your minor children or grandchildren
-Reduces or eliminates Federal and Massachusetts Estate Taxes
WILL I LOSE CONTROL OVER MY ASSETS?
No! The living trust is a written legal document that allows you, as the trustee(s), unlimited access to and full control over your assets during your lifetime. It also enables you to pass property after your death to family, friends and/or loved ones. The Living Trust allows you to appoint someone (a successor trustee) to make certain your property is distributed to the ones you choose after your death.
HOW DOES A LIVING TRUST WORK?
For a trust to be effective it has to own title to the property or asset. Remember, when you transfer title of your assets into the trust it is called “Funding your Trust.” Funding is the process of transferring the name on accounts or property to the name of the trust. For example, accounts in the name of Bill and Mary Stevens, would now be held as “Bill and Mary Stevens, Trustees of the Stevens Family Trust dated date signed and year”
HOW DOES A LIVING TRUST AVOID PROBATE?
When the assets are in the name of the trust, there is no need for probate since the estate is now controlled by the trustee of the trust. You can be the primary trustees receiving full control to buy, sell, borrow or transfer in the event of a spouse’s death.
After both spouses pass away, the trust identifies the person who will act as successor trustee. The trust gives that person the right to manage all assets on behalf of your wishes made known in the trust document. Remember, you and your spouse will decide who will manage all affairs.
HOW DOES A LIVING TRUST AVOID GUARDIANSHIPS?
With a “Fully Funded Living Trust” you can also decide in advance and appoint the person who would manage your assets if you should become incapacitated.
IS A LIVING TRUST SIMILAR TO A POWER OF ATTORNEY?
Yes. However, one advantage of a Revocable Living Trust is that the trustee(s) has the legal right to manage the assets. This makes communication with banks and financial institutions a lot easier than with a Power of Attorney. Third parties, such as banks, are many times more comfortable dealing with a trustee than they are dealing with just a durable power of attorney.
WHO IS INVOLVED IN MY LIVING TRUST?
The following is an explanation of the different roles of the people who are involved in your Living Trust.
(a) Trustor
This is the person who sets up the trust. This would be you. The grantor has many names such as the creator, settlor or grantor. As the grantor, you have full control to manage or change the trust at any time.
(b) Trustee
The trustee is the person who will manage the assets in the trust. Again, this will most likely be you while you are alive. When a trust is created, the trustees are usually the same individuals as the grantor. For married couples, usually the husband and the wife both act as co-trustees.
(c) Successor Trustee
This is the person who will manage your assets for you when you die or if you should become incapacitated. This person will have the right to manage your affairs without the need for any probate. The successor trustee will immediately have the same powers that you as trustee had to buy, sell, borrow or transfer the assets inside the trust. More importantly, the successor trustee has the right to distribute the trust’s assets according to your instructions in the trust.
This immediate control can allow your estate to be transferred to your children or loved ones immediately avoiding the probate burden. The successor trustee, however, does not have the legal right to change your trust. The trust becomes irrevocable or unchangeable after the death of the Trustor(s). However, the successor trustee does have the right to manage the assets in the estate, but must do so for the benefit of the beneficiaries.
(d) Beneficiaries
The people who will receive the benefit of the trust’s assets are called the beneficiaries. Typically, the estate will go to the surviving spouse. If there is no surviving spouse, assets will pass to the people you named in your trust. You can name your children, relatives, friends or a charitable organization to be your beneficiary.
WHAT HAPPENS WITH THE LIVING TRUST WHEN I DIE?
After you pass away, your successor trustee or co-trustee will have the same responsibilities an executor would have if you had prepared a will. However, since your trustee is not required to report to the probate court everything is accomplished more efficiently and privately.
ADVANTAGES OF A LIVING TRUST
If an illness or accident leaves you incapacitated, your successor trustee can handle your financial affairs without the need for a court appointed guardian or conservator.
If the beneficiaries of your trust are minor children or others who might not use an inheritance as you intend, the trust can continue to hold the assets until they reach a more mature age.
If you own real property in more than one state you avoid the expense, time and hassle of multiple probate proceedings.
By using a trust, a husband and wife can maximize both their federal estate tax exemptions.
It is almost impossible to contest a Living Trust. When a will is contested the assets are frozen. Such assets cannot be distributed until the claim is resolved. Assets placed in a Living Trust are not frozen. To contest a trust, one must file suit against a beneficiary. In the meantime, the assets in the trust can be distributed.
HOW DOES THE LIVING TRUST AVOID ESTATE TAXES?
By adding several special paragraphs to your Living Trust, a husband and wife can give each other permission to divide the trust evenly into two sub-trusts at the death of the first spouse to die – one for each spouse. The survivor’s trust is known as Trust A (Family Trust) while the decedent’s trust is known as Trust B (Survivors Trust).
The $1,000,000 Massachusetts exemption of the first spouse to die is used to shelter Trust B. The survivor’s $1,000,000 exemption is put on hold and reserved to shelter Trust A when the survivor also dies a few years later. The couple can now take full advantage of both of their exemptions and by current standards pass up to $2-million to their heirs completely free of Massachusetts Estate Taxes and $25,800,000 (2023) to their heirs completely free of Federal Estate Tax.
Unfortunately, all assets over $2-million will be estate taxed in Massachusetts, but not estate taxed at the federal level as the federal exemption allows a couple to protect up to $25 million dollars (2023 and beyond).
There are many advantages to this type of Trust:
The surviving spouse can spend both principal and income from his/her own Trust A in any manner; no restriction. Trust B becomes irrevocable at the death of the first spouse to die. It cannot be changed by the survivor (perhaps through the influence of a new spouse) as can happen with a will. Thus, the rights of the deceased spouse are protected even after death.
The surviving spouse is permitted to spend all income earned by Trust B such as interest and dividends, plus the greater of $5,000 or 5 percent of principal in Trust B every year in any manner, no matter how foolishly.
In addition to the yearly $5,000 or 5 percent of principal that can be spent in any manner from Trust B, the surviving spouse is also permitted to spend unlimited sums of principal from Trust B for education, health care and to maintain the lifestyle enjoyed during the marriage.
This Trust is also ideal for couples on their second marriages since each spouse can place assets in the trust for the mutual enjoyment and use of both, but upon death must come out of the trust and be distributed to the heirs of the first marriage.